Opinion
01 Civ. 2275 (FM)
March 7, 2002
MEMORANDUM DECISION
I. Introduction
In this diversity action, plaintiff Société Générale ("SocGen") seeks a declaratory judgment that the refunding of certain Special Revenue Transportation Bonds, Series of 1999 ("1999 Bonds"), by defendant Port Authority of Allegheny County ("Authority") does not require SocGen to pay a "Termination Amount" because of an exclusion contained in Section 3.2 of a Reserve Forward Delivery Agreement ("Agreement"), dated as of November 10, 1999, among the Authority as issuer, SocGen as provider, and National City Bank of Pennsylvania ("Bank") as trustee. The Authority, in turn, has counterclaimed to recover such a Termination Amount on the theory that it terminated the Agreement pursuant to Section 7.11, not Section 3.2. Section 7.11 affords the Authority the right to terminate the Agreement early in certain circumstances.
The Authority and SocGen have now made cross motions for summary judgment. The Authority also seeks a trial on the issue of damages. For the reasons set forth below, SocGen's motion is granted and the Authority's motion is denied. In addition, the Clerk of the Court is directed to close this case.
In late April 2001, Soc Gen's complaint was dismissed without prejudice as against the Bank. Thereafter, on August 13, 2001, with the consent of the remaining parties, Judge John G. Koeltl referred this case to me for all purposes pursuant to 28 U.S.C. § 636(c).
II. Facts
Both sides agree that the material facts regarding liability are not in dispute. Those undisputed facts may be summarized as follows:
A. Agreement
On or about October 15, 1999, the Authority issued the 1999 Bonds pursuant to an Indenture of Trust ("Indenture") between the Authority, as issuer, and the Bank, as Trustee. The 1999 Bonds had an aggregate face value of $225 million and maturity dates ranging, in six-month intervals, from March 1, 2010 to March 1, 2029. (SocGen R. 56.1 Stmt. ¶ 1).
The Agreement facilitated the Authority's efforts to make payments to bondholders required by the Indenture by providing that SocGen would periodically deliver to the Bank, and the Bank would purchase from SocGen on behalf of the Authority, certain "Qualified Securities." (Agreement Art. II). SocGen was required to deliver these Qualified Securities, which took the form of maturing United States treasury bills, approximately six months before each date that the 1999 Bonds were to be repaid. (Id. § 2.2; Authority Mem. at 5). Through this arrangement, the Authority was able to lock in a guaranteed 6.17 percent rate of return on the Qualified Securities. (SocGen R. 56.1 Stmt. ¶ 6). The Agreement provides that, in return for its services, SocGen is to receive a fee. (Agreement § 2.5).
The Agreement states that it is to continue until the later of the last payment date of the 1999 Bonds, i.e., March 1, 2029, or the date that the Authority and the Bank have satisfied all of their contractual obligations thereunder. (Id. § 9.2). There are only three circumstances in which an earlier termination is authorized: (1) in the event of a default by any of the parties (id. §§ 7.4-7.6); (2) upon the Bank's exercise of its right of optional early termination under Section 7.11 after ten business days' written notice; or (3) in connection with the Authority's decision to redeem, defease, refund, or repurchase the 1999 Bonds under Section 3.2 upon at least fifteen business days' notice.
Unlike Section 7.11, Section 3.2 of the Agreement does not require that the notice be written.
The present dispute arises because the Agreement requires the payment of a Termination Amount in the event of an optional early termination under Section 7.11 but not in the event of a "refunding" under Section 3.2. SocGen contends that the Agreement was terminated by a refunding and, therefore, that no payment is due. (SocGen Mem. at 13-15). The Authority concedes that it eventually engaged in a refunding, (see 10/16/01 Tr. ("Tr.") at 29 ("We don't have the slightest quarrel with the chronology")), but contends that it nevertheless properly exercised its right of early termination before that refunding took place. (Authority Mem. at 17-18). Accordingly, the Authority seeks to compel the payment of a substantial Termination Amount. Section 7.11 of the Agreement provides that the Trustee may elect to terminate the Agreement at any time, "in whole or in part," provided that the Trustee furnishes "evidence satisfactory to [SocGen] that it has the funds sufficient to pay any Termination Amount, if any, owing to [SocGen] as a result of such optional termination." As noted above, in order to invoke this provision, the Trustee must give SocGen "ten (10) business days' prior written notice" of the early termination.
During oral argument, the Authority's counsel stated that he was unsure of the Termination Amount, but believed that it was "around $650,000." (Tr. 21).
The Authority takes the position that there was no Termination Amount owed to SocGen by the Authority, Indeed, the Authority believes that SocGen was the party liable to pay a Termination Amount. (See n. 3, supra).
The Agreement defines the Termination Amount payable in the event of an optional early termination as the amount that will preserve the economic equivalent of the parties' rights for the unexpired term of the Agreement. (Agreement, Art. I, at 4). The parties are to determine this amount by taking the arithmetic mean of three quotes obtained by the party burdened by the optional early termination from dealers willing to provide similar services. (Id.). Depending upon interest rates at the time of termination, the burdened party could be either the Authority or SocGen. Accordingly, an early termination could lead to a Termination Amount being owed by SocGen to the Authority, or vice versa. As Section 7.11 of the Agreement expressly states, however, "no Termination Amount shall be payable by either party as a result of a partial or complete termination pursuant to Section 3.2." Section 3.2 of the Agreement sets forth the procedures applicable to a "refunding" of the 1999 Bonds. The Section provides, in relevant part, that:
(a) The [Authority] may, by giving [SocGen] at least fifteen (15) Business Days' prior notice, but without the consent of [SocGen], redeem, defease, refund, or repurchase the [1999] Bonds as provided in the Indenture; provided, that if the [Authority] takes any such action, the [Authority] shall terminate the Agreement; provided, further, that no Termination Amount shall be due and payable by either party as a result of such early termination of this Agreement.
(b) If Pursuant to clause (a) above this Agreement would be terminated in connection with a refunding of the [1999] Bonds, the [Authority] may, by written notice to [SocGen], request that [SocGen] continue this agreement and have it apply to such refunding bonds (the "Refunding Bonds "). [SocGen] agrees that if it receives such a request it may agree to so continue this Agreement with respect to the Refunding Bonds and the [1999] Bonds remaining outstanding after such refunding, provided that:
. . .
(iii) on or prior to the date the Bonds are to be refunded (the "Refunding Date ") the [Authority] and the trustee of the Refunding Bonds enter into such amendments of this Agreement with [SocGen] (the "Amended Agreement ") as are necessary. . . .
(Id. § 3.2) (italics added; underscoring and bolding in original).
The Agreement further provides that New York law shall govern any disputes. (Id. § 9.9).
B. Refunding
In late December 2000 and early January 2001, Paine Webber Incorporated ("Paine Webber") and Salomon Smith Barney ("Salomon") contacted the Authority's finance department about the possibility of refunding the 1999 Bonds for which they had served as co-lead underwriters. (SocGen Exs. G, H; SocGen Rule 56.1 Stmnt ¶¶ 9-10).
Both firms estimated that the Authority could achieve substantial savings through such a refunding because interest rates had declined considerably since the 1999 Bonds were issued. (SocGen Exs. G, H).
Thereafter, as SocGen's uncontested chronology establishes, the Authority and its two principal advisors undertook a series of measures intended to result in the refunding of the 1999 Bonds. Among these actions were the following:
• On January 17, 2001, the Authority held an organizational meeting with Paine Webber, Salomon, and others to discuss the possibility of an advance refunding of the 1999 Bonds. (Id. Ex. I). In connection with that meeting, the Authority and its consultants prepared a "Time and Responsibility Schedule" listing the steps required to complete a successful refunding, the dates those events were to occur, and who was responsible for them. (Id. Ex. J).
• On January 18 and 24, 2001, Paine Webber and Salomon submitted detailed analyses which indicated that the Authority could realize a net present value savings of more than four percent by refunding the 1999 Bonds. (Id. Exs. K, L).
• On January 26, 2001, the Authority passed a resolution authorizing the issuance of a series of refunding bonds ("Refunding Bonds") to be used for the sole purpose of "refunding the 1999 Bonds and paying the associated costs and expenses. (Id. Ex. N). Significantly, the resolution required the Authority to achieve a net present value savings of at least three percent of the principal amount of the 1999 Bonds before the refunding could take place. (Id. at 003).
• On February 9, 2001, the Authority
— obtained a commitment from the Financial Guaranty Insurance Company to provide municipal bond insurance for the Refunding Bonds. (Id. Ex. Q).
— issued its Preliminary Official Statement for the Refunding Bonds, which stated that the proceeds of their sale would be used to "advance refund the outstanding [1999 Bonds]" and pay associated costs and expenses. (Id. Ex. R at 1).
• On February 16, 2001, the Authority subscribed for more than $239 million in United States Treasury Time Deposit Securities — State and Local Series, with an issue date of February 28, 2001. (Id. Ex. Y; SocGen R. 56.1 Stmt. ¶ 28). The requested issue date was revised several times as the closing date of the refunding transaction changed. (SocGen Ex. Y).
These securities, commonly known as SLGS, are issued by the Treasury to state and local governmental issuers of tax exempt securities to assist them in complying with yield restrictions and arbitrage rebate provisions of the Internal Revenue Code. See http://www.public debt.treas.gov/spe/spefasql.htm(last visited Feb. 28, 2002).
• On March 1, 2001,
— Salomon issued a pricing wire soliciting offers for the Refunding Bonds. (Id. Ex. BB)
— Acting on behalf of a consortium of underwriters, Salomon entered into a Bond Purchase Agreement with the Authority, pursuant to which the Authority agreed to sell, and the underwriters agreed to buy, all of the Refunding Bonds at par value ($250,695,000), less an original issue and underwriters' discount. (Id. Ex. DD).
• On March 21, 2001, the closing in connection with the sale of the Refunding Bonds took place. (Id. Ex. FF). The Authority achieved a net present value savings of approximately 3.25 percent, or $7,330,909.34, by issuing the Refunding Bonds. (Id. Ex. GG).
C. Dispute Regarding the Termination Amount
As these steps were being taken, SocGen was fully aware of the Authority's intention to refund the 1999 Bonds. (See Tr. 15, 29). In fact, on February 5, 2001, George Majors, of Public Financial Management, a financial advisor to the Authority, sent an email to a SocGen employee requesting that SocGen "consider" making a "payment" if Majors could demonstrate that it was necessary for the refunding to be viable. (See Authority Ex. 9; SocGen Ex. M). Majors noted that the "odds of it coming to that are very, very low." (Authority Ex. 9). As a consequence of communications such as these, SocGen unquestionably had more than fifteen days' advance notice of the Authority's intent to refund the 1999 Bonds.
On February 14, 2001, the Bank, acting at the Authority's instruction, provided SocGen with written notice of its intent to terminate the Agreement "in accordance with Section 7.11" ten business days hence. (SocGen Ex. V). The notice was expressly subject to "the condition that a positive [T]ermination [A]mount is currently payable to the [Bank]" and asked SocGen to "notify [the Bank] as soon as possible as to the Termination Amount." (Id.). Because of intervening weekends and Presidents' Day, the notice period did not expire until March 1, 2001.
On February 15, 2001, SocGen objected, in writing, to the Bank's suggestion that it might be liable for a Termination Amount. (Id. Ex. W). As SocGen's letter to the Bank explained, because "the [Authority] is terminating the Agreement in connection with a refunding of the [1999] Bonds, such termination constitutes a termination pursuant to Section 3.2 of the Agreement," pursuant to which no termination amount is payable by either party. (Id.).
In its reply letter, the Authority observed through counsel that the proposed refunding was conditioned on achieving a three percent savings rate. (Id. Ex. X).
Because that level allegedly had not yet been achieved, the Authority maintained that the "action of terminating the Agreement was taken completely independently of any refunding and obviously is being done whether or not a refunding occurs." (Id.).
C. Parties' Theories
In its papers, the Authority contends that Section 7.11 grants the Authority an unfettered right to terminate the Agreement at any time before the Refunding Date. (Authority Mem. at 9). Accordingly, in its view, the fact that the Authority eventually completed a refunding of the 1999 Bonds is irrelevant so long as the Bank, as trustee, gave SocGen the required ten days' notice of the Authority's intention to exercise the right of early termination. (Tr. 24). The Authority contends that any other interpretation of the Agreement "would effectively render [S]ection 7.11 a nullity if there was any indication whatsoever that [a] refunding was under consideration." (Authority Mem. at 9).
For its part, SocGen maintains that Section 3.2 is the controlling provision if the notice of termination is given "in connection with a refunding." (SocGen Mem. at 14-15). SocGen argues that the fact that there may have been a gap between the effective date of the termination and the Refunding Date is therefore irrelevant. (SocGen Reply Mem. at 3).
II. Discussion
A. Applicable Law
Summary judgment may not be granted unless "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); see Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The moving party has the initial burden of "informing the district court of the basis for its motion" and identifying the matter that "it believes demonstrates the absence of a genuine issue of material fact." Celotex, 477 U.S. at 323. If the court concludes that "the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no `genuine issue for trial,'" and summary judgment must be granted. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S. Ct. 1348, 1356, 89 L.Ed.2d 569 (1986) (quoting First Nat'l Bank of Arizona v. Cities Serv. Co., 391 U.S. 253, 289, 88 S.Ct. 1575, 20 L.Ed.2d 569 (1968)). In making this determination, the court must "draw all justifiable inferences in favor of the nonmoving party, including questions of credibility and of the weight to be accorded particular evidence." Masson v. New Yorker Magazine, 501 U.S. 496, 520, 111 S.Ct. 2419, 115 L. Ed.2d 447 (1991). If the moving party has met its burden, however, the opposing party "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita, 475 U.S. at 586. The nonmovant must set forth specific facts, not mere speculation or conclusory allegations, to demonstrate the existence of a genuine issue of material fact. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49, 106 S. Ct. 2505, 91 L.Ed.2d 202 (1986); Allen v. Coughlin, 64 F.3d 77, 80 (2d Cir. 1995).
In contract actions, summary judgment is appropriate only if there is no genuine issue regarding the meaning to give to different contractual clauses. See Cable Science Corp. v. Rochdale Vill., Inc., 920 F.2d 147, 151 (2d Cir. 1990). In this case, the Agreement provides that it is to be governed by the laws of the State of New York. (Agreement § 9.9). Accordingly, this court must give effect to the intent of the parties "as revealed by the language they chose to use." See Seiden Assoc. v. ANC Holdings, Inc., 959 F.2d 425, 428 (2d Cir. 1992). When a provision is not ambiguous, the court must avoid the temptation to redraft the agreement to make it comply with the court's sense of equity. See Terwilliger v. Terwilliger, 206 F.3d 240, 245 (2d Cir. 2000). In considering a particular provision, however, the court should examine the entire structure of the agreement and attempt to reconcile its various provisions. Id. In doing so, the court may examine the "the surrounding circumstances [and] apparent purpose which the parties sought to accomplish." See Cable Science, 920 F.2d at 151.
B. Application of Law to Facts
At the outset, one may question whether a notice of termination which is expressly subject to the "condition that a positive termination amount is currently payable to the [Bank]" is adequate to exercise the Authority's optional right to terminate the Agreement early pursuant to Section 7.11. Although SocGen argues that such a notice is ineffective, (see SocGen Mem. at 18-19), even if one were to assume that it is sufficient to invoke the Authority's rights under Section 7.11, the Authority still would not be entitled to recover any Termination Amount from SocGen for several reasons.
First, the Authority's attempted reliance upon the three-week gap between the March 1st effective date of its termination notice and the March 21st date that the closing was held in connection with the sale of its Refunding Bonds is misplaced.
Although Section 3.2(b) of the Agreement does refer to "the date the [1999] Bonds are to be refunded" as the "Refunding Date," this defined term is relevant only if (i) the Authority makes a written request that SocGen continue to provide its services under the Agreement after the Refunding Bonds are issued and (ii) SocGen agrees to do so. Here, it is undisputed that there was no such request or assent.
Accordingly, the only applicable portion of Section 3.2 of the Agreement is subsection (a). Subsection (a) requires the Authority to terminate the Agreement if, after "giving [SocGen] at least fifteen (15) Business Days' notice," it "takes any . . . action" to "redeem, defease, refund or repurchase the [1999] Bonds." (Agreement § 3.2(a)) (emphasis added). The subsection further provides that, in such circumstances "no Termination Amount shall be due and payable by either party." (Id.).
There is no question that SocGen knew about the Authority's intent to refund the 1999 Bonds at least fifteen business days before the refunding took place.
Indeed, for reasons which have not been fully explained, one of the Authority's advisors actually solicited SocGen in early February 2001 to make a financial contribution in connection with the refunding if that proved necessary to ensure its successful completion. The Bank's subsequent written notice to SocGen, although ostensibly issued pursuant to Section 7.11 of the Agreement, also provided confirmation that the refunding of the 1999 Bonds was proceeding.
Since SocGen had adequate notice of the anticipated refunding, the only remaining question is whether the Authority can be said to have taken any "action" to refund the bonds more than fifteen days after that notice was given. In that regard, although subsection (b) of Section 3.2 plainly relates only to situations in which SocGen has been asked to continue its forward delivery services after a refunding of the 1999 Bonds, its language nevertheless sheds light on the purpose of subsection (a) because it refers to a termination pursuant to subsection (a) as one that occurs "in connection with" a refunding of the 1999 Bonds.
Here, the undisputed facts show that the Authority took not just one or two steps, but a series of carefully orchestrated actions, to refund the 1999 Bonds. Among other things, the Authority and its advisors organized a team to consider the desirability of a refinancing, prepared several analyses establishing that the time to do so was ripe, secured authorization to incur as much as $300 million in indebtedness to facilitate the refunding, obtained a commitment for municipal bond insurance, issued a preliminary official statement concerning the offering, and presold the bonds subject to a later closing. As part of this process, the Authority also served SocGen with a written notice of its intention to terminate the Agreement. Although the notice purported to be given under Section 7.11 of the Agreement rather than Section 3.2, it would exalt form over substance to find that the termination that was the subject of the notice was not undertaken "in connection with" a refunding of the 1999 Bonds.
The Authority advances several arguments in an effort to overcome this conclusion. First, the Authority contends that SocGen's interpretation of the Agreement would cause the Authority to lose its ability to collect a Termination Amount in circumstances in which it had undertaken only a preliminary consideration of a refunding.
Second, and related to the first contention, the Authority suggests that SocGen's interpretation of Section 3.2(a) would render Section 7.11 a nullity. Last, the Authority maintains that its decision to terminate the Agreement before the actual closing of the sale of the Refunding Bonds meant that there was some risk that the refunding would never be completed, thereby establishing that the termination was effected pursuant to Section 7.11 rather than Section 3.2(a). None of these theories withstands scrutiny.
Contrary to the Authority's suggestion, the Authority and its consultants did not merely evaluate the possible costs and benefits of refunding the 1999 Bonds before giving its notice. Had that been the full extent of the Authority's activity, there might well be considerable force to its argument that its written notice of termination was unrelated to a refunding and, therefore, did not require that it forfeit its right to collect any Termination Amount that would otherwise have been due. As the undisputed facts show, however, the Authority's termination notice here was part and parcel of the refunding. For example, the "Time and Responsibility Schedule" distributed at the January 17, 2001 organizational meeting specifically indicates that the Authority, in connection with the issuance of the Refunding Bonds, must "[p]rovide notice of refunding to [SocGen] regarding termination of [the Agreement]" on February 12, 2001. (SocGen Ex. J) (emphasis added). According to the Schedule, the Refunding Bonds were then to be priced and marketed two or three days later. Although the notice of termination was actually given two days later than scheduled, and the pricing and marketing of the Refunding Bonds also were somewhat delayed, the conclusion that the Authority's notice was given as part of a "refunding" of the 1999 Bonds is inescapable.
In fact, only two days after the notice was given, the Authority purchased $239 million worth of specialized SLGS securities to help it meet the "debt service requirements of the Refund[ing] Bonds." (See SocGen Exs. Y, GG at 2). There consequently is no evidentiary support for the suggestion that the Authority's notice was unrelated to the planned refunding.
There also is no basis for the contention that Section 7.11 of the Agreement would become a nullity if the Authority's notice to SocGen is treated as having been given in connection with a refunding. Indeed, Section 7.11 expressly provides that "no Termination Amount shall be payable by either party as a result of a partial or complete termination pursuant to Section 3.2 of this Agreement." Thus, to the extent that a notice given under Section 7.11 also potentially implicates Section 3.2, the language of Section 3.2 controls, and the parties contractual rights under Section 7.11 are subordinate.
This express prioritization of the two termination provisions also accords with the apparent purpose of the parties to the Agreement. As noted earlier, the Agreement provides that the Termination Amount due and owing in the event of a default or optional early termination should be a number "which would have the effect of preserving for the Burdened Party the economic equivalent of its rights under this Agreement." (Agreement, Art. I, at 4). This makes sense in the event of a default by SocGen since the Authority presumably would then have to enter into a comparable reserve fund forward delivery agreement with another vendor and it would be reasonable to allow the Authority to recover any increased costs it incurs. The provision also makes sense in circumstances in which the Authority elects to terminate the Agreement early for reasons unrelated to a refunding — such as dissatisfaction with SocGen's services. In such situations, depending upon current interest rates, either the Authority or SocGen could suffer an economic loss as a result of the optional termination.
On the other hand, it would not make sense for a rational issuer of government bonds to engage in a refunding unless interest rates had dropped to the point that the savings would be sufficiently large to make the effort worthwhile. In this case, for example, it is undisputed that the Authority's decision to refund the 1999 Bonds resulted in a net present value savings of more than $7 million. As a result, if SocGen were required to pay a Termination Amount, the Authority would not simply be made whole, but, rather, would obtain a windfall because it obviously has not sustained any economic loss attributable to the termination of the Agreement.
Furthermore, it is the Authority's reading of the Agreement, not SocGen's, that would render a portion of the contractual language surplusage. As Section 7.11 expressly states, in the event of a refunding the provisions of that section are subordinated to those of Section 3.2. Nevertheless, because an optional early termination under Section 7.11 requires only ten business days' notice, under the Authority's reading of the Agreement, the Authority could always circumvent the fifteen days' notice required by Section 3.2(a) in connection with a refunding by availing itself of the shorter notice period for an optional early termination. By this means, the Authority could ensure that it would not be required to pay, and might well be able to receive, a Termination Amount in every instance in which it sought to terminate the Agreement. It defies credulity to suggest that the parties reasonably anticipated that, notwithstanding the language of Section 3.2, the Authority would be able to compel SocGen to pay (or forego) a Termination Amount simply by sending SocGen a preemptive termination notice pursuant to Section 7.11 whenever interest rates favored the Authority while a refunding was underway.
Finally, in its papers the Authority makes much of the fact that it faced the prospect that the Refunding Bonds "might not have been sold for months or ever," thereby exposing it to some risk as a result of its decision to give SocGen notice that it was terminating the Agreement pursuant to Section 7.11. (See Authority Mem. at 12).
The only real contingency, however, was the requirement that the Authority realize a net present value savings of three percent through the refunding. As the Authority's own consultants indicated, however, the risk that this target could not be reached without a contribution from SocGen was "very, very low." Moreover, whether the Authority had some real risk between the date of this notice and the date the sale of the Refunding Bonds closed is not dispositive. Instead, the critical question is whether the notice was given in connection with a refunding of the 1999 Bonds. In this case, the undisputed documentary evidence plainly establishes that it was.
On January 18, 2001, Paine Webber estimated that the net present value savings resulting from a refunding would be 4.06 percent. (SocGen Ex. K). On January 24, 2001, Salomon estimated that the savings rate would be between 4.072 and 4.306 percent. (Id. Ex. L). Similar reports by Salomon on February 1 and 7, 2001 estimated that the rate would be between 3.19 and 3.3 percent. (Id. Exs. O, P). The actual final savings rate resulting from the refunding was 3.26 percent. (SocGen R. 56.1 Stmnt. ¶ 41).
III. Conclusion
For the foregoing reasons, SocGen's motion for summary judgment is granted and the Authority's cross-motion is denied. The Clerk of the Court is directed to enter judgment against the Authority consistent with this Memorandum Decision and close this case.
SO ORDERED.